Thursday, January 12, 2012

Excerpts from 'The Real Romney'

Some snippets from the upcoming book "The Real Romney" currently excerpted in Vanity Fair

The special one in the house was [Mitt Romney's wife] Ann, with her wide smile, piercing eyes, and steadying domestic presence. And woe was the boy who forgot it. [Son] Tagg said there was one rule that was simply not breakable: “We were not allowed to say anything negative about my mother, talk back to her, do anything that would not be respectful of her.”...

Romney described himself as driven by a core economic credo, that capitalism is a form of “creative destruction.” This theory, espoused in the 1940s by the economist Joseph Schumpeter and later touted by former Federal Reserve Board chairman Alan Greenspan, holds that business must exist in a state of ceaseless revolution. A thriving economy changes from within, Schumpeter wrote in his landmark book, Capitalism, Socialism and Democracy, “incessantly destroying the old one, incessantly creating a new one.” But as even the theory’s proponents acknowledged, such destruction could bankrupt companies, upending lives and communities, and raise questions about society’s role in softening some of the harsher consequences...

Romney, for his part, contrasted the capitalistic benefits of creative destruction with what happened in controlled economies, in which jobs might be protected but productivity and competitiveness falters. Far better, Romney wrote in his book No Apology, “for governments to stand aside and allow the creative destruction inherent in a free economy.” He acknowledged that it is “unquestionably stressful—on workers, managers, owners, bankers, suppliers, customers, and the communities that surround the affected businesses.” But it was necessary to rebuild a moribund company and economy. It was a point of view he would stick with in years ahead. Indeed, he wrote a 2008 op-ed piece for The New York Times opposing a federal bailout for automakers that the newspaper headlined,"Let Detroit go bankrupt." His advice went unheeded, and his prediction that “you can kiss the American automotive industry goodbye” if it got a bailout has not come true....

For 15 years, Romney had been in the business of creative destruction and wealth creation. But what about his claims of job creation? Though Bain Capital surely helped expand some companies that had created jobs, the layoffs and closures at other firms would lead Romney’s political opponents to say that he had amassed a fortune in part by putting people out of work. The lucrative deals that made Romney wealthy could exact a cost. Maximizing financial return to investors could mean slashing jobs, closing plants, and moving production overseas. It could also mean clashing with union workers, serving on the board of a company that ran afoul of federal laws, and loading up already struggling companies with debt....

Marc Wolpow, a former Bain partner who worked with Romney on many deals, said the discussion at buyout companies typically does not focus on whether jobs will be created. “It’s the opposite—what jobs we can cut,” Wolpow said. “Because you had to document how you were going to create value. Eliminating redundancy, or the elimination of people, is a very valid way. Businesses will die if you don’t do that. I think the way Mitt should explain it is, if we didn’t buy these businesses and impose efficiencies on them, the market would have done it with disastrous consequences.”

Regarding the first quote, I consider it admirable: It was never a spoken rule in my house growing up, but I never heard my father speak a disrespectful word to my mother and this example was all we needed. Similarly, my children will never hear me speak disrespectfully of their mother, my wife. Yes, they will hear us disagree from time to time, but the boundaries are always clear.

Posted at 11:24:23 AM

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Disclaimer: I am not a fan of Romney, although I agree with the "creative destruction" (as in we don't need to save the jobs of ice cutters after refrigerators are invented) view.

If Romney displayed ineptitude, dishonesty or unduly took advantage of crony rather honest capitalism opportunities in his business dealings, those would be valid lines of criticism. But criticism of on the basis of being in the business of freeing up capital from money losing (i.e. capital consuming = standard of living reducing) or, more generally, sub-par (returns less than elsewhere for the same risk) operations, is totally misplaced. He didn't actually need to be in the business of creating jobs directly, as freeing up capital from sub-par operations is a huge value add activity in itself, allowing others to invest it in more productive (read improving people's standard of living) activities. Unfortunately, this misguided line of attack will indeed be used against him because the majority of people, when it comes to economic processes of wealth creation / standard of living improvement can not think their way out of a paper bag.

You're absolutely right on the aspects of the business Romney was in (though the various tax breaks for his work certainly border on crony capitalism).

However, Romney is taking credit for something he wasn't trying to do. It's very hard to trace through the ultimate economic effects of the vulture capitalists (the "freeing up capital" may or may not be counteracted by the concentration of capital in the hands of a few), but it is indisputable that the goal of Bain and their ilk is not the creation of jobs. They are indifferent to that.

So Romney needs to stop taking credit for something he wasn't trying to do. His activities led to the creation and destruction of jobs, but was ultimately about enriching Bain.

Maybe people can't "think their way out of a paper bag," but they certainly can see that the rhetoric doesn't match the reality, and contributes to the sense that Romney is inauthentic and unprincipled.

@EPE
I share your opinion of Romney as a person, but I would also say that this particular spin of a [honest] profit generating business for political gain is perhaps the smallest of his offences. He is up against human brain wiring that mistakenly tends to regard Morther Teresa is a more of a benefactor of humanity than the likes of Bill Gates. So if others can gain political capital from their supposedly altruistically motivated but ultimately low impact activities, I don't mind successful businessmen claiming public benefit from their self-interested activities.

@Dienne
Sometimes you make fact-supported well through remarks, and sometimes you just say things for affect with nothing to back it up and no depth. Unfortunately, the "Except that it doesn't actually work that way, as the past 30 years have shown us. Usually that liberated value just ends up imprisoned again in some 1%er's off-shore tax shelter." seems to be in the latter category. BTW, tax-sheltered doesn't mean unproductive, that is not invested. And you do understand that money not used for consumption and not hidden under the mattress are one way or another invested in economic activity, right?

Of course I agree with Boris and I find the criticisms of Romney to be economically illiterate (Perry) or opportunistic (Gingrich). I'm no fan of Romney either but let's at least criticize him for the correct things; there is plenty of material out there.

EPE asks an interesting question - should Romney get credit for job creation (or blame for destruction) if it's not something that he was directly trying to do? The answer is that he should take credit for net job creation because it is a foreseeable consequence of what Bain was trying to do (i.e., enrich itself). Bain could not be successful unless the businesses in which it invested were successful, and a successful business is almost always a net job creator.

@Dienne - Actually, tax shelters haven't been effective or widely-used in the past 20-25 years or so. It is not worth the risk to get involved with one of those because it will mean jail time for the investor and the advisor. No reputable firm, including my own, will go anywhere near anything that remotely resembles a tax shelter. A U.S. person is taxed on his worldwide income and failure to report any part of that income is a prosecutable offense regardless of the origins of that income. The penalties associated with trying to defraud the system through shelters or non-reporting are not nearly worth the risk from the perspective of a wise investor or his advisor. Trust me on that.

The evidence is all around you, Boris, if only you'd open your eyes. Since restrictions against vulture capitalism (an apt term, EPE, 'though I've seen it elsewhere), wages, benefits and standard of living for average Americans have stagnated or gone down, while the 1% are living lavishly off of money that they have well protected from ever having to benefit the rest of us slouches in the form of taxes. Public infrastructure is crumbling, public schools are dramatically underfunded, public hospitals and health services are being slashed by the day. Food pantries don't have enough to keep up with growing demand. More and more people are losing their homes or having to chose between medications vs. rent. We're living in a third-world banana republic. There is absolutely no societal good in having wealth concentrated in fewer and fewer hands, which is what vulture capitalism does.

I tend to agree that creative destruction is a good thing in the long run, much like natural selection. However, another thing they have in common is that in a civilized society, we should be willing to sacrifice some of the efficiency benefits in order to temper the harm to some individuals or groups. Laws against murder most likely create a drag on natural selection but we have them anyway. There is nothing wrong -- and a lot right -- with prohibiting some things in business even though they are economically efficient or simply taxing the winners to some degree in order to provide for the losers.

Did Mitt Romney cross what I would consider the lines if I took the time to understand private equity in enough detail to know where they should be? Who knows? Maybe not. However, much as with him possibly getting attacked for being Mormon, I sort of don't care. The modern Republican Party is largely built on appeals to the ugliest appeals to financial and religious prejudice. (Yes, I do realize exactly how inflammatory that statement is. Feel free to tell me why I am wrong but let's admit we are not going to convince each other.) If Romney were running against that and getting attacked for Bain and being Mormon, I would have his back. However, he is actually appealing (really awkwardly since I doubt he means it) to that ugliness so if it blows back at him, I have no sympathy.

[There's actually an amazing amount of agreement here today, which is nice, but...]

Greg J, I have to take issue with one thing you wrote. The private equity world is surprisingly indifferent to the success of the businesses they take up (at least if we regard success as being the creation of an ongoing concern). It's about extracting value, without much regard for what's left behind.

And we see that with Bain. The Romney-invested companies are a mixed bag of those that are now successes (the ones for which he now takes credit), and the ones that are gone. In both cases, though, Bain came out demonstrably ahead, not through shepherding these companies to a better place, but through the extraction of fees and carefully-constructed equity positions.

These companies like Bain prove that they can be successful without the underlying companies being successful - it is difficult to say whether or not, on net, Bain is a job creator (especially if you focus on domestic jobs).

Romney's contention that he "knows how to create jobs," then, is clearly false through your own reasoning. That jobs may be created as a by-product of private equity activities is not a strategy, and it certainly isn't obvious that that constitutes a well-wrought plan for a President to carry out.

I agree with you that real wage growth is stagnant but I disagree that it's necessarily related to the standard of living. Also, keep in mind that the income gap between the poorest and the wealthiest isn't relevant when looking at the economic health of our poorest citizens.

Public infrastructure needs to be improved and we need to repeal regulations that increase the cost of infrastructure projects. I don't think that public schools are underfunded but rather that resources are being misallocated. We need to get rid of all of these education bureaucrats and instead allocate that money to real teachers. People are losing their homes because the government incentivized banks to give them mortgages that they can not afford. Behind all of the financial problems affecting the poor is a government that minsunderstands basic economics. The way to help the poor is to repeal regulations on building projects, lower corporate taxes, say no to bailouts and crony capitalism, and stop creating an environment where economic decisions get distorted to the benefit of the already wealthy.

You know you and I agree about destructive affects of crony capitalism and that we are paying real and heavy price for the past and present administrations of all stripes promoting it. But you seem to mix everything together and not see the difference between that and real capitalism, the kind that elevated everyone's standard of living. (The vast majority of those who in the U.S. are considered poor would probably qualify as well-to-do in most of the world or a bit further back in history. Admittedly, just having running water, a toilet and a shelter would probably do the trick.)

Do you have evidence or logic (besides the self-serving "open your eyes") to support your claim that venture capitalists (which essentially is just a form of more active investment, you can easily say Warren Buffett is one) are causing wealth concentration. Can your offer logic or evidence that wealth concentration as such is bad thing economically (in fact, one may argue that it results in bigger portion of income being invested; it is possible to argue that it has negative political ramifications though). Would you rather have a country where the bottom 80% has $10 each and the top 20% $1000, or the one where everyone equally has $1?

Comparing capitalism to natural selection can only go so far. An important feature of a salient analogy is not only existence of parallels, but absence of differences that would be core to the discussion. In this case, the core difference is that natural selection doesn't benefit individual members, its a competition of DNA and there are really winner and loser DNA. A zero sum game. In contrast, while competition is a key feature of capitalism, self-interested voluntary cooperation that is just as much a feature of capitalism as competition, if not more so, just not talked about because it is so ubiquitous (think about all the cooperation that has to happen to bring the food to your dinner table). In fact it would be accurate to say that [honest] capitalist competition is for being better at cooperating with others. So competition is subservient to cooperation. Capitalism is not a zero sum game. Of course there are losers. However, the majority are only short term or relative losers.

There is no logical requirement or merit for an asset owner to continue to deploy that asset the same way it was before. It certainly would not make any sense if there was a better use of the same asset (for example, a company worth more sold part by part is a good indication of that.) What exactly is the mechanism by which a venture capitalist makes an honest profit, but the result is a net loss for the economy? It seems logically impossible, but maybe you are aware of a way.

P.S. re: EPE's "That jobs may be created as a by-product of private equity activities is not a strategy, and it certainly isn't obvious that that constitutes a well-wrought plan for a President to carry out"

Actually, creating a legislative/administrative environment that promotes honest profit making is strategy (with a lot of tactical detail to take care of). Whether we believe Romney the person would do that is another matter.

This is a big discussion for a snowy afternoon, but there is a legitimate argument on the basis of profit/loss vs. utility. I would contend that utility is a better measurement of the success of an economic activity than is a strict dollar accounting; therefore, we can have an interesting discussion about that (if 60,000 people each save a dollar on a sweater because the sweater-making job is offshored, and that job only paid $50,000, we're $10,000 better off - but are we? [I'm comparing stock to flow, yes, but the point is the same]).

But I'm not seriously looking to restrict the activities of the capitalist, as long as we don't somehow give preference to those activities (through taxation, corporate welfare, etc.). My point was basically that the capitalist him/herself can't take credit for something that is incidental to their activities.

I don't believe for a second that Romney-as-President knows how to create jobs in an economically productive manner, something he demonstrated in his time in Massachusetts. And to show that this is not a political argument (at least on my part), I don't think Obama knows that either.

I agree that the analogy only goes so far, although I think I followed a relevant similarity in reaching my conclusion. Natural selection involves quite a bit of cooperation. You are a collection of many genes that each increase their chances of reproducing by working together. Your parents cooperated in propagating their genes through you. (They, of course, had no alternative, assuming you were conceived before successful cloning of mammals, but sexual reproduction instead of superficially more-efficient asexual reproduction is an example of cooperation.) Since you and I share most of our genes, if I help you produce children who survive to reproduce without costing my own children too much, that is cooperation that promotes the survival of my genes.

There certainly is cooperation that brings food to my table. I don't think most of it is between companies that otherwise would be competing except in the sense that each one of them might aspire to be the single mega-company providing every possible good and service. Mostly, they cannot do so and find it efficient to specialize and cooperate with those who have different specialties. To the extent that they can compete, they mostly do, don't they? I would say that cooperation is subservient to competition. The companies will choose competition if they see a chance to compete successfully.

As to the majority being only relative or short-term losers, that is largely because of the constraints on capitalism that we have enacted. For the most part, getting thrown out of work or getting bested in a business transaction does not literally cause the "loser" and his or her offspring to die because we do have safeguards. For most of history, it could mean exactly that. Also, but for constraints, the most efficient way to practice business would sometimes be to put competitors or potential competitors (and their relatives) to death in order to keep them from gaining or regaining the strength to beat you later.

The entire debate is really about what constraints to put on pure capitalism. Not even Ron Paul calls for none. (I noted the other day that he made some joke in New Hampshire that the fire marshal would not be pleased about the number of people at his rally but seemed to accept the concept that the fire marshal should be entitled to set such limits.) No mainstream Democrat, especially President Obama, is calling for any system that is not overwhelmingly capitalistic.

You didn't get the point of what cooperation I am talking about. Perhaps because as I said, it is so ubiquitous, you don't even think about it. Division of labor, all the buyer and seller relationship along the whole chain of production and consumption, that's all voluntary cooperation in a capitalism society. Competition in that context is competition for who can create more value for others along the chain of these voluntary cooperative relationships.

You are also historically quite wrong. Capitalism was lifting the standard of living across the board way before the welfare state.

Reasonable interference (with individual liberty to honestly pursue happiness) would not be with capitalism as such, but in areas where there exists what is known as "public good" (non-rival and non-excludable; clean air is a decent example of that, but one can expand that to a bit grayer areas, such as public tranquility and social cohesion).

@EPE We are not in much disagreement. Except in the utility vs. profit dichotomy. For one thing, do you have a way to measure utility? For another, per my paragraph above, if there is a discrepancy, it has to be in the area of "public goods". By suggesting, albeit mildly, that politicians should have the power to answer and act on the questions such as the one you raised about a cheaper sweater, you are indicating a willingness to open the door to a very expansive interpretation of "public good", allowing groups to benefit clearly and directly by presenting their own interests as "public good". And you are not asking the questions: where does the saved $10K go? as well as what does the off-shore producer do with $50K (dollars can be spent only on $ denominated products or invested in $ denominated financial instruments.)

You raise a fair concern but our rather small disagreement has mostly to do with how one's intentions affect the overall economy. There is no doubt that Bain invested in some eventual winners and some eventual losers. It looks like the gains of the winners, and perhaps the number of winners, exceeded the losses and losers. It also looks like Bain came out ahead even sometimes when the underlying business went under.

My only argument is that Bain's actions, in its own self-interest, was net beneficial to the economy and created (net) jobs that wouldn't otherwise exist. That doesn't make for a nice soundbite but I think it's true. Sure, Romney should be careful how he chooses his words but his GOP critics are being willfully ignorant or outright dishonest.

I'm finding it hard to work up much passion when I basically agree with everybody :-)

@Boris: It's not that I am not asking the questions (and I do believe utility to be a viable concept, though inability to measure is a real killer). In fact, I am asking those very questions (at least of myself), but many of them don't seem to have easy answers. That's why I tend to look askance at those who "have the answers," namely, politicians and pundits. I don't think we understand these things at a very deep level yet.

@GregJ: Bain may have created net wealth, it may not have. I can't answer that, and I'm pretty sure Romney can't either. I was never in favor of restricting Bain's activities. I was just making the point that the political rhetoric, whether for or against Romney, doesn't have a lot to do with reality. The unwillingness of people to seek the truth, no matter how obscure, offends me (which is why I am so very tired of politics).

@EPE
I agree and would go further to say that even more than unwillingness to seek the truth, unwillingness to accept the limits of what is knowable and controllable offends me. It would be refreshing to hear "I don't know / None one can claim to know / May be in principle unknowable / May be knowable, but not subject to our will" out of a politician. I am not holding my breath.

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